Bank of Canada Holds Interest Rates

As was widely expected, the Bank of Canada left overnight rates unchanged at 0.75 percent and reiterated earlier comments about the likely trajectory of the Canadian economy. The Bank is more optimistic about the economy than private sector forecasters, believing that a rebounding U.S. and global economy will spur Canadian business investment and exports in coming months.

The problem is that business investment growth has declined sharply in the wake of the oil price rout and ensuing collapse in business investment in the oil patch--a situation that is not likely to improve anytime soon.
 

In addition, a marked further improvement in Canadian net exports likely awaits a further decline in the Canadian dollar, which has strengthened a bit recently with the uptick in oil prices. Although the Bank of Canada would never admit it publicly, they would welcome some slippage in the loonie to help boost trade.

The Bank continues to aver that "the underlying trend of inflation is 1.6 to 1.8 per cent, consistent with persistent slack in the economy". They will certainly continue with the current level of monetary accommodation until the economy moves closer to fully employment and inflation moves back to the midpoint of the 1-to-3 percent target band, which is not likely until next year.

The Federal Reserve, on the other hand, will like raise rates in September. Nevertheless , the Bank will remain on the sidelines as the Fed rate move will no doubt be anticipated and put downward pressure on the Canadian dollar.

Ironically, the Bank has no direct control over longer-term interest rates, which have risen significantly in the past month or so. Five-year government bond yields, which are closely linked to domestic mortgage rates, are determined by global market forces. These yields have risen in the U.S., Canada and elsewhere from a considerably overbought position, steepening the yield curve. Thus, the Bank will get no help from credit-sensitive spending to meet its forecast for stronger growth for the rest of this year. 

Bank of Canada's Poloz dispels speculation of housing bubble

The Bank of Canada’s top brass assured a parliamentary committee that Canada’s bloated housing market has not become a risky asset bubble, despite the central bank’s own calculation that house prices nationwide are roughly 20 per cent overvalued.

“We don’t believe we’re in a bubble,” Bank of Canada Governor Stephen Poloz said in testimony Tuesday to the House of Commons Standing Committee on Finance. He said Canada’s long-running boom in the housing market hasn’t been underpinned by the kind of rampant speculative buying that is the hallmark of an asset bubble. “Our housing construction has stayed very much in line with our estimates of demographic demand,” he said. “There’s no excess.”

This despite the central bank’s own estimate, published last December in its Financial System Review, that Canada’s housing market is overpriced by between 10 and 30 per cent. Mr. Poloz indicated that he believes the overvaluation is not a symptom of runaway prices and widespread investor speculation, but rather of ongoing strength in consumer demand spurred by historically low interest rates – rates that were cut by the central bank in order to keep consumer demand buoyant to support Canada’s economy during the Great Recession. “This is one of the byproducts of what we’ve been through. It’s not something that happened simply by itself,” he said. “It would be very unusual to have that and not have a degree of overvaluation.”

Mr. Poloz added that the overvaluation doesn’t necessarily mean the market is in need of a 10-to-30-per-cent downturn to bring it back into balance. He said that rising incomes as the economy gains momentum could help close the affordability gap, without a sharp drop in home values.
Senior Deputy Governor Carolyn Wilkins added that the central bank still believes Canada’s overall housing market is “headed for a soft landing,” despite the sudden oil-shock upheaval that threatens considerable instability in Alberta. “We’re not expecting whatever transpires in Alberta to create spillovers that would be, from a financial stability perspective, worrisome for the rest of Canada,” she said.

In its Monetary Policy Report published two weeks ago, the Bank of Canada expressed concern that the oil shock’s impact on Alberta’s housing market, as well as the continued price booms in Toronto and Vancouver, “suggest a risk of a correction in these markets.” It added that if all three of these major markets were to suffer a downturn simultaneously, “the spillover effects to the rest of the economy would be significant.” However, Ms. Wilkins stressed that historically, regional housing downturns typically remain localized events. “We don’t see that regional crashes tend to spread to other areas.”

Are Banks Telling Clients to Rate Shop?

Brokers having to deal with flighty rate shoppers is nothing new, but one broker’s recent experience suggests banks may actually be encouraging that bold behaviour.

“This just came up a couple weeks ago – a client came to me to apply for a mortgage and they had already spoken to the bank,” Mike Celuch of Mortgage Intelligence told MortgageBrokerNews.ca. “The bank told the client to go see a broker, find out what rate they will offer and that they’d match it.”

Celuch lost that particular client’s business. Though he has, in the past, been able to earn the business of rate shoppers.

“If I know upfront that that’s what the client is doing I’ll just say to them, ‘here, this is the rate I’ll offer, but I’m not going to waste my time for nothing,’” he said. “’If you want to stay with me I’ll give you the best rate I can.’”

With the prevalence of rate comparison websites and aggressive promotional campaigns from the big banks, brokers have to deal with rate-focused clients who are intent on shopping around until finding the best rate.

Some brokers have combatted this by asking clients to sign commitment letters. For his part, Celuch uses them on a case-by-case basis.

“I do have a form that, if I think a client is using me, I get clients to sign but the problem is how enforceable is it?” he said. “It’s similar to a contract that real estate agents us; it’s a broker agreement that states they are applying for a mortgage for X amount of dollars, and the client expects the commitment. If they cancel I am entitled to a fee of X amount of dollars.”

Dominion Lending Centres Chief Economist Dr. Sherry Cooper Cautiously Optimistic After Bank of Canada’s April Rate Policy Announcement

Following today's Bank of Canada’s announcement that it will hold overnight rates steady at 0.75%, Dominion Lending Centres’ Chief Economist, Dr. Sherry Cooper, says the outlook is unclear for the Canadian economy and the prospects for a potential rebound in the second half of 2015 are still uncertain.

The Canadian economy has experienced a substantial slowdown in recent months due to drops in the price of oil, and Dr. Cooper expects that any changes to the nation’s economic performance will likely be a result of an improvement in non-energy sectors emanating from the weakness in the Canadian dollar.

“While March employment in Canada improved substantially, business investment remains disappointing,” added Dr. Cooper. “The Bank of Canada has suggested that we will see a transition towards positive growth in exports and capital spending by non-energy producers—both boosted by the depreciating Canadian dollar, but in the near-term, incoming data will likely confirm continued weakness in the manufacturing sector, particularly in autos, and only modest growth in retail sales.”

Dr. Cooper reiterated her confidence in the Bank of Canada’s monetary policy strategy for 2015, despite the current weakened status of the Canadian economy: “I am cautiously optimistic that the Bank has got it right, but I continue to believe that the risks are on the downside for the economy and inflation.  My forecast for Canadian growth this year is 1.5 percent--below the Bank’s 1.9 percent forecast. Much hinges on the U.S. economy.”

March Madness - Market Update

March Madness has begun. The annual spring real estate season is officially underway. The starting gun sounded with the latest round of posted mortgage rate cuts – in some cases to all time record lows.

But, of course, there is a catch. Mortgage shoppers will have to take a very close look at the conditions attached to these deals. They can be very restrictive, designed more to tie the borrower to the bank and build market share, rather than offer a genuinely cheaper rate.

It has been noted by savvy market watchers that the new, posted rates are not really any lower than the unadvertised rates that have been out there recently.

The services of an independent mortgage broker can be very helpful as springtime temperatures rise and the market hype heats up.

Panel Predicts Future of Rates

Just prior to the Bank of Canada’s rate announcement four industry leaders predicted where rates will go within the next 30-45 days, and a consensus was reached.

As part of RateSupermarket.ca’s expert panel, both Dan Eisner, president of True North Mortgage and Dr. Ian Lee, program director at Carleton University Will Dunning, CAAMP’s chief economist, and Kelvin Mangaroo, president of RateSupermarket.ca came to a consensus that fixed rates will drop.

“Bond investors, encouraged by a lower-rate environment in response to plunging oil, clamoured post-announcement, driving yields to sub 0.7 per cent levels,” the panel wrote. “Combined with competitive pressures from the heating spring market, lenders are expected to work with the limited discounting room they have in order to capture market share.”

According to the panel, rates have remained competitive since the surprise overnight rate drop by the Bank of Canada in late January, with lenders discounting both fixed and variable rates.

And despite the fact that the Bank of Canada held its overnight rate at ¾ per cent this morning, the panel believes variable rates will see a drop in the next month as well.

“Canada's biggest lenders have yet to fully implement the 0.25 per cent discount prescribed by the Bank of Canada in January,” the panel wrote. “Regardless of whether the Bank cuts rates again in the short term, competitive factors could lead the "Big Five" to finally concede the remaining 10 basis points to borrowers.”

DLC Chief Economist Comments on BoC Rate Announcement

Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres (DLC) was expecting the Bank of Canada to leave interest rates unchanged today in the wake of the surprising rate cut in late January. Governor Stephen Poloz signaled this wait-and-see stance last week, following criticism that his surprise move had destabilized financial markets, thwarting the Bank’s efforts to boost economic activity. “The Bank has become increasingly concerned about the dampening impact of the plunge in oil prices on business capital spending and production in the oil sector—a key component of Canadian economic expansion in the past,” said Dr. Cooper. Recent layoff announcements in the oil patch exacerbate this concern.

“For now, core inflation in Canada remains quite low, giving the Bank plenty of leeway to maintain a very accommodative policy stance,” said Dr. Cooper. “However, the weakness in the Canadian dollar will increasingly show through in rising import prices, as so many consumer and business products are imported from the U.S.”

The Bank of Canada continues to project that the dampening impact of lower oil prices will be felt in the first half of this year, leaving open the possibility of another rate cut in coming months, maybe as soon as its next meeting on April 15. The hope is that the weaker Canadian dollar will offset the oil price shock by boosting non-energy exports and investment. Lower oil prices have been good for consumers and non-energy businesses that are heavy users of energy.

Dr. Cooper believes that with “the U.S. economy leading global economic expansion, the Federal Reserve is poised to hike rates for the first time in nearly eight years, probably by the late-June meeting. This alone will put some further downward pressure on the Canadian dollar. Hence, the Bank of Canada’s caution in cutting rates now; but if non-energy exports and business investment do not follow through, the Bank will cut interest rates further, accepting the Canadian dollar fallout”.

“My view is that the Canadian economy will grow at about a 2-1/4 percent pace this year with long-term yields edging higher by yearend. In sum, while mortgage rates might fall a bit further in the next couple of months,” said Dr. Cooper. “They are headed higher by year end. The rise, however, will be muted. Next year, expect the Bank of Canada to begin to tighten, raising overnight rates very gradually. This, of course, is predicated on a near-term bottoming in oil prices, edging to the $60-to-$65 a barrel range in the next year. As always, central bank action will be data dependent.”